MISFORTUNE IN THE 1980s
9281 Computerland Business Case 1986
[This is the main part of the documented case we successfully put to 3i, in order to get their backing]
1 SUMMARY
The proposed business, which is a personal computer dealership franchised from Computerland, is conservatively forecast to make a net profit before tax of £150,000 in its second year of operation (and £350,000 in year 3), on a turnover of £3 million pa (well below the projected industry average; but based on twice the number of trained sales personnel). The proposed investment is £460,000 (funded by equity of £215,000 from the 2 partners and 3i and £145,000 long term loan from 3i; backed up with a £75,000 long term bank loan and with an initial £25,000 overdraft facility) to cover the projected worst cashflow of up to this level (comprising 65% working capital, with debtors of £160,000 and stock of £160,000) in year 1
Based on market research evidence the business will be targeted at providing expert in-depth (business) support, particularly in the newly emerging communications/ multi-user fields and the larger specialized industry segments, backer by the credibility of the Computerland name.
It will be staffed by a team of highly qualified salesmen (two thirds of whom have already demonstrated that they can achieve achieve sales of £300,000 per annum in this field); and the existence of these personnel (already recruited or identified) effectively guarantees the performance forecasts .
2 THE (PRODUCT) SERVICE
The proposed service will basically comprise Personal Computer dealership (retailer) under a franchise from Computerland.
The main element of the business will be the sale of Personal Computing (PC) equipment via an expert sales force using the selected premises as a base for support. The attached profit and forecast (appendix A) conservatively based on virtually 100% of income coming from the sale of PC equipment (largely as packaged systems, and mainly based on the IBM PC).
In addition though there will be a number of other (lesser) offerings, which (though not included in the deliberately pessimistic profit projections) will: make a significant contribution to profits;
a) Training - this will be offered as free support to customers (in lieu of any discount, and as part of on-going marketing), but a significant amount will be sold independently (at £150 per day). Indeed the physical facilities (which are about the best in the South East will be used to support two trainers operating this part of the business as a separate profit centre.
The comparable Manchester branch of Computerland targets 90 days per year (almost all fee paying) each with 8 participants. The City branch reports similar figures. Both have a turnover of around £100,000 per annum (at a very high rate of profit) from this activity alone, using just one trainer.
No allowance for this income is however included in the forecast.
b) Customer Engineering – normal IBM facilities will be offered. Again the other dealers make up to 10 % of their income from this source (at a relatively high rate of profit).
Once more no income from this source is included in the forecast.
c)Consultancy/Support - a limited amount will be offered initially (where this is a major revenue earner for systems houses but not conventionally for Computerland), at £300 per day; mainly in the area of advice to small businesses, but also in the more technical areas (such as local area networking) to larger firms.
Again no income is allowed for.
d)Architectural Drafting Bureau - a specialised bureau service will be offered as part of a Computer Aided Design (CAD) package (primarily designed to sell hardware/software at £20,000 a time).
Income from this activity is conservatively forecast at only £25,000 in year 1 and £50,000 in year 2.
The Computerland franchise is a standard ‘package` and the profit and loss forecast is based on their (conservative) figures. They are the largest computer dealers in the world with approximately 800 branches (and a turnover of $1.5 billion in 1984) with a reported success rate in excess of 98%. The indications are that they and Granada are the only chains likely to survive relatively unscathed in the UK over the next year. Our research has shown that all other chains are likely to either go out of business, or survive only in a dramatically reduced form.
3 MARKET RESEARCH
3.1 MARKET SIZE
The overall market for business PC's was estimated by ROMTEC to be £500 million in 1984 for hardware alone (with an extra £200 million for software). Based on IBM's increase alone the 1985 figure for total sales through IBM authorised dealers will be in excess of £800 million.
With some 400 authorised IBM dealers this represents an average revenue of £2 million each; though with an estimated minimum of a third of these likely to go out of business before the end of 1986, the average level should rise to around £3 million. This level, as a realistic target (but based on only 4 salesmen), has been confirmed by the Computerland dealers contacted. The overall market in the London area is relatively larger, reported by PC User market research to be 50% of the UK total for a population of only 12 million, but this is balanced by the larger number of dealers in the area.
The specific markets targeted are;
a) Purely Local - the local borough of Hounslow contains a total population of 200,000. This should generate (proportionately to the 12 million population of London) some £6 million sales, to be solely available to the business (after the opening of the new outlet, but excluding the WH Smith dealer outlet which is widely reported as due to close and excluding a 'front' for CMG Computers); double the national average.
b) 15 Minute Car Travel – this is seen as being the most realistic area for initially attracting further general business. Within this radius there are approximately 0.8 million people;
Egham/Staines 72,000
Sunbury 92,000
Walton/Weybridge 112,000
Richmond 162,000
Kingston 134,000
Hillingdon 230,000
---------
802,000
On the same basis as a) this area should generate sales of around £25 million. This would be shared by approximately 20 dealers, giving an average sale of £1.25 million. A similar share (for year 2) is assumed since the great majority of competing outlets are small, poorly sited, systems houses serving central London in the main.
The sales team already handle accounts throughout west and central London, outside the 15 minute driving range. Thus, there is a potential market overall of some £200 million per annum (which is not yet directly served by any Computerland branches). Again adopting a conservative forecast no allowance for further sales into this wider market is included (though in practice we would expect significant sales to be achieved over the wider area; based on the demonstrated calibre of the sales team and their existing business contacts).
c)Specialist Markets - in addition to the general market, special expertise will be applied to three 'industry' segments, which will relate to prospects within a 45 minute pr vine distance (since there is very little such industry expertise offered by IBM PC dealers);
I) MANUFACTURING - there are 120,000 establishments in the UK,with perhaps 25% in London (and perhaps 12% in the target area, giving up to 15,000 establishments).
II) CONSTRUCTION - with 180,000 establishments in the UK (and up to 22,000 establishments in the target area; on the same basis as above).
III)ARCHITECTS - 'with 20,000 in the UK (and in excess 3,000 in the target area); with a possible CAD requirement of between £20,000 and £50,000 each.
Although this expertise will be backed up by investment in extra demonstration equipment (in excess of £20,000), again no specific allowance for sales is included in the forecast
The IBM forecast predicts a compound growth in all the above sales volume figures of 35% per annum: through to 1990. On that basis the year 1 (1986/87) and year 2 (1987/1988) national averages per dealer should be adjusted upwards from £2 million to £3 million and £4 million respectively (£4.5 million and £5 million respectively if the expected dealer attrition takes place). Despite the existence of a highly qualified sales team which is twice the average size the conservative below industry average" figures of £1.5 million and £3 million have still been used in the sales forecast.
The available research evidence backs the common-sense view that (up to saturation; which with a potential of £200 million does not yet apply in this case) the sales levels are directly proportional to the number of salesmen (and to their calibre). The average sale per salesman in Computerland in the UK is reported to be in excess £400,000; where our forecasts assume less than £200,000 in year 1 and £250,000 in year 2 (with a significantly higher calibre of personnel).
3.2 CUSTOMER PROFILE
Based on the PC User survey the following profile has been determined;
Approximately one third of the existing usage is accounted for by small firms (who are accordingly under-represented), with two thirds going to larger firms. The great majority are IBM PC users.
Around two of companies using PC's have a centralised procurement policy (reducing to just under a half of small firms); with IBM specified in four fifths of cases.
The great majority of existing users (more than four fifths) state that they are likely to acquire single user micros in the next yea- (and two fifths expect to buy multi-user micros). They still have considerably less than one micro per three employees (and even management in large firms typically share one micro between 20 managers), but nearly a half of them expect to at least reach this level (1:3) within the next 5 years.
Around three quarters rate mainframe communications as particularly important, as they also do local area networks.
Installations split approximately half each to ‘manufacturing’ and service. Nearly half of users already are responsible for three or machines.
The main customer group therefore will be existing users in larger companies. The user department managers (as well as the central DP departments) will be approached on the basis of the special skills needed to plan and introduce local area networking, to meet their special (industry based) needs.
At the same time small business users will be targeted on the basis of expert business consultancy advice.
Finally, ‘vertical.' markets, in the very broadest sense, will be addressed in the areas of construction and production/manufacturing_
3.3 CUSTOMER REQUIREMENTS
Based on a study of the published market research (mainly as reported by ROMTEC but also including the PC User survey) the following requirements are being addressed;
a) Product Selection Factors - the main factors in the market place are personal recommendation (35%) and personal experience (16%). These are to be addressed mainly by a "user-club", but also by the use of seminars and references (as wel1 as by the use of the existing industry contacts of the sales personnel).
Beyond this though the main factors are;
I)‘SUPPORT’: which is seen by customers as their key "product" need:
good general support and maintenance 53%
local sales and support source 34%
This stress is confirmed by the fact that ‘better support’ was the only major item of improvement required (59%)
The business will resource, and stress, in its promotion, expert support in depth.
II) EXPANSIBILITY FOR FUTURE NEEDS : users (48%) were understandably nervous of their ability to 'handle developing, but unknown, requirements.
The business will carry the widest range of IBM equipment (including ‘leading-edge’ multi-user systems, local area networks and Computer Aided Design) , to allow maximum user system growth, and will be promoted on this basis.
b)Major Support Motivators – the key elements of support demanded by users are;
I) TRAINING/EDUCATION: (72%)
The business will have extensive training facilities and will offer a wide range of courses.
II) INSTALLATION SUPPORT: (63%)
The business will employ general support specialists (as opposed to the programmers used by system houses) and will specifically' train, sales staff to provide support as part of their marketing efforts.
III) PRE-SALES )NVESTIGATION
The intention is to offer pre- sales consultancy, preferably as a form of group training and chargeable.
c) Sales Message
The overriding customer perceived benefit of personal computing is that of management information; faster management information 77%, "comprehensive business information 43%, improved accuracy 62% and save executive time 40%; improved customer service is also important; 53%, with 34% enhanced image.
Reduced business operating costs were, perhaps surprisingly in view of the prevalence of discounts, seen as much less important; stock costs 11%, labour costs 26% and overheads 19%. In this respect, at least, customers are probably more realistic than dealers.
The key sales requirement is for explanation, ‘technical explanation' 39%, as opposed to aggressive sales pitches.
The business will stress the industry-based business information expertise of its partners and staff (trained by the partners and sales staff with specialist experience), building on in-depth analysis of the customer requirements.
d) Sales Techniques - the sales techniques reported by customers as being successful were;
I) DEMONSTRATION :the most successful opening technique is a demonstration; "demonstration" (46%) and "demonstration at similar user" (391). This is reinforced by the customer view that "effective demonstration' (43%) was the most effective marketing resource.
The business will feature a large demonstration area, with the widest range of IBM equipment; backed up by sales and support staff trained to demonstrate it.
I) SEMINARS - the most effective way of securing personal interviews is by invitation to a seminar/presentation (70%).
The business will have excellent facilities for such seminars (including good parking).
SALESMEN - micro-computer salesmen are justifiably mistrusted, because they have poor knowledge of the products and even worse understanding of the customer's business needs.
Our sales personnel have been rigorously selected, on the basis of personal knowledge by the sales manager, for these key attributes. They will also receive extensive training in product and industry as well as sales technique; David Mercer at various stages ran key parts of IBM's sales training as well as its business training (in conjunction with the London Business School).
a Large Companies – the DP professional as a greater involvement in the decision process in this sector of the market-place. To them the PC has the advantage of being easier to introduce (65%) and putting responsibility on the end user (55%); as well as making end users more DP aware (71%).
The perceived disadvantage is ‘loss of control’; loss of coordination (58%), data security (53%) and ‘development’ (42%).
These factors will be addressed by the offer of an expert local coordinating/planning role by the partners and salesmen.
f)Types of Application : more than two thirds (68%) of users have standard accounting packages installed, and this is the widest use. Only slightly fewer (58%) have installed more specialised, but still fairly standard, modules such as production control and order entry; often, though, requiring some tailoring.
Just over half (56%) use the packages such as spreadsheets, WP and database, that most dealers specialize in.
Just over a quarter (27%) uses vertical software specific to their industry.
The business has already obtained the high level of expertise necessary to address the more-specialist standard modules (in general accounting and “horizontal" packages). It will also cover the largest "vertical" markets of construction and manufacturing (as well as architects).
3.4 COMPETITION
The most direct competition is the other high street dealers, including other Computerland branches (of which the nearest is in Woking; outside the 15 minute radius). There is an Entre branch, the most direct (but very weak) competitor, in Kingston on the border of the 15 minute radius, where there was also an Interface branch (now in
receivership); and there is a WH Smith dealer branch in Hounslow (though it is strongly rumoured that WH Smith will also pull out).
Most of the other local PC dealers within the 15 minute radius are apparently small systems houses, though at least one advertises discount mail-order (though the disreputable state of its premises do not augur well for its future, since clearly fails to meet IBM's standards). They are however still the sitting tenants with the existing customer base (though much of this is likely to be in Central London rather than local).
The first priority will be to contact the existing customer base of these competitors, using mass marketing techniques.
4 MARKETING PLAN
4.1 OVERALL MARKETING STRATEGY
The key to the strategy is to obtain the best sales team possible, and back them up with the best support. The key management personnel have already agreed to join the company, and most of the remaining salesmen and support personnel (to the requisite high calibre) have also already been recruited or identified. The evidence is that the sales team will be one of the strongest in the country, even on day one.
The core of the "Product" strategy will be the provision, of a compete "value-added package", including all aspects of support , based on the most expert investigation of the customer 's (management information) requirements.
This will be based on industry knowledge in depth, with availability of the most expert support.
Mass marketing techniques (based on David Mercer's experience of setting up IBM’s programmes) will be used as far as possible for both sales and support.
4.2 "PRODUCT" PACKAGE
The aim will be to tailor a package, including support as well as software and hardware (and if necessary cabling and construction work) to the individual, needs of each customer.
Where feasible this will be based or a "survey” (preferably charged as consultancy, but perhaps refundable from the overall package price).
Support will, include the training and consultancy services necessary to unsure a fully working system. This will be, as far as possible, based on classroom training sessions. The cost may be, at least in part, recoverable by the customer against the package purchase price; in lieu of any discount.
All the necessary personnel to provide these various categories of expertise have already been identified.
4.3 PROMOTION AND ADVERTISING
In addition to the existing wide customer contacts of the sales team the range of mass marketing methods will be used to bring prospects to the centre, rather than (in the initial stages) sending sales personnel out to them;
a) Mailings :the main initial contact will be via mailings to all suitable businesses (with named recipients) within the 15 minute radius, and then to selected businesses, particularly those in the fields of construction, architecture, production, within a 45 minute radius. Optimus have been retained as the advertising agency.
b)Advertising :the mailings will be supplemented by limited advertising in the computer and trade press.
c) Public Relations : Fitzroy public Relations have been retained as consultants, and suitable events will be run to act as foci for this function. In particular, the "user-club", initially open to all PC users, will be used to host events.
d)Seminars/Open-Days :the prime mass selling device will be the seminar (together with open-days). This will be the focus of mailings, and will where possible be industry oriented with a suitable key outside speaker. They will be run in the evening as well as in daytime; and refreshments will be provided.
e) Demonstrations: the culmination of seminar and sales campaigns will usually be a demonstration. Ideally this will be tailored to the industry of the prospect.
f) Trial Use: under the banner of the ‘user club’ facilities and technical support will be provided at an hourly charge, to allow the few undecided prospects to try out their requirements. The epitome of this will be the drafting service for architects.
Based on the existing Computerland experience, it is expected that the effective advertising/promotional budgets (generated from revenues; at £60,000 in year 1 and £90,000 in year 2) will be more than doubled by contributions from suppliers giving more than £100,000 in year 1 and nearly £200,000 in year 2; which will give a very significant promotional leverage to the sales team).
4.4 SALES TACTICS
The intention is that the initial prospecting and qualification stages of the sale will be made using the above mass marketing techniques.
The sales campaign itself will stress the level of (industry based) support available as evidenced partly by the already demonstrated expertise of the salesmen, reinforced by in-house training by the partners and industry specialists, but in particular by the partners and industry specialists themselves to provide in-depth industry expertise.
Sales territories (with accounts each being the responsibility of a specific salesman) will be split by selected application/product/industry areas as well as geographically, though salesmen be trained to support (at least to basic level) all products covered by the team.
4.5 PRICING POLICY
A recent phenomenon, which fortunately may prove to be a relatively short-lived phenomenon for the upper tier of dealers, has been widespread discounting. This resulted partly from IBM’s price-break policies, which encourage smaller dealers to sell on the margin. It also partly resulted from the smaller dealers, who cannot offer significant support, being put under pressure. In any case, it is normal at this stage of the life cycle of an IBM product (ie. immediately prior to replacement by a new range) for sales to tail off and prices to move down; but then to harden again when the new range is announced (expected later this year). I
Price should not be, according to market research, a major factor, and IBM has now reestablished tighter control (by toughening up its requirements on dealers applying to renew their dealerships, and by creating a higher level of "superdealers" for its multi-user systems), as have the other manufacturers. Two of IBM's directors have now moved to MBS, and have instituted reduced discounting from this quarter (even losing business to establish the policy). As a result discounting pressure is already reducing and there is every chance that it will reduce significantly towards the end of 1985, when the significant reduction in the number of dealers should result in it once more becoming a ‘sellers market:'.
1t is reported that discounting is less prevalent in the more technical areas, and 'vertical markets', which are the prime targets of the business. The intention will be to progressively move into the more technical markets and into the vertical smaller business markets, to obtain better margins.
In any case discounts will be avoided, each to be approved by a manager or partner, with free support (which has a low net cost) being offered in lieu.
5 PERSONNEL
5.1 MANAGEMENT
One of the key elements of the venture, after the Computerland franchise package, is intended to be the breadth and quality of experience derived from the two partners, and staff. Between them the partners’ business experience covers most industries, and most functions within them;
a) Ian Donaldson AAdipl ARIBA
With 25 years experience as a qualified architect, he has run his own practice and also worked as Associate Partner and as Project Manager of multi million pound projects, both in Europe and in the Middle Fast.
His experience covers a wide range of building types, including housing, industrial, commercial and prestige office buildings; and he has worked for Central Government, Client, Consultant and Contracting organisations.
His interest in computers goes back to 1970 when he was working with John Laing Research and Development, where he helped create CAD programs for system built offices and also an assessment program for site slabs set in various terrains and linked to a 80Q output.
He is currently working with a computer company specialising in CAD and other programs relating to the construction industry.
b)David Mercer BA BSc ARCS MInstM
After a career in brand and marketing management leading to a position in general management, covering a range of industries from fast moving consumer goods (inc. Gallahers and Cussons) to manufacturing, he has spent the past 15 years working for IBM.
In that time he has successfully held positions in sales, admin, and marketing staff (including new product management). The key elements have included running the Biomedical Group for 5 years, coordinating the UK’s Marketing Plan and (jointly with the London Business School) running IBM's business education.
Most recently he has held posts in PC Market Development, has run the London venue of IBM's prestige international EXHIBIT exhibition and has been project manager for the earliest phases of the new Basingstoke marketing headquarters; one of the most highly computerised/networked office complexes in the world.
The sales manager has been recruited and the salesmen have already on the basis of personal knowledge by the sales management, and most of these also have records of sales in excess of £300,000 per annum. Similarly, fully qualified support personnel, with excellent track records, have been identified.
Between them the team have had management or consultancy experience in the following industries;
Computing Electronics Engineering (High Tech)
Medical Engineering (Job Shop) Process/Rubber
Consumer Packaged Goods Tobacco Education
Soap Household Pharmaceutical Food
Confectionery Construction Property Development
Hotels Advertising Architecture Civil service
Local Government Paper Brewing
Capital Goods Machine Tools Architecture Publishing
and in the following functions;
R&D New Products Production Engineering Engineering Design Electronics Manufacturing Batch Production Line Process Quality Control Production Control Sales Marketing Brand Management Advertising Exhibitions Accounts Funding Cost Accounts Venture Capital Management Property Services Construction Project Management Acquisitions Corporate Planning Marketing Planning Computing Network Planning IBM Cabling DP Management Program Development Admin Systems Analysis Consultancy
Occupational Medicine Publishing Recruitment
5.2 MANAGEMENT RESPONSIBILITIES
A1though management of the company will be by a Management committee comprising the two partners and the sales manager, with informal support from the other managers, each partner will also have more direct management responsibilities;
a) Ian Donaldson Architecture/Construction Industries (inc. bureau work)
Personnel Management and Contract Work
b) David Mercer General Business/Manufacturing Industry
Marketing Management Technical Supper and Training
Financial Management
The Sales Manager will have specific responsibility for management of the sales team.
To back up this "board level" management two other managers will handle certain activities;
a) Office Manager/Accountant: the central resources (admin personnel and all equipment) of the company, as well as control of financial systems, will be managed on a daily basis by this manager.
b) Software/Training: the technical support (hardware CE as well as software) resources and staff of the company will be managed by this individual.
5.3 OTHER STAFF
a) Sales
The critical factor of the whole operation is the establishment of an effective sales operation as soon as possible. A. sensitivity analysis snows that net profit is best improved by hiring (the best possible) extra salesmen, and making them effective, to generate extra sales.
At £15,000 basic salary each, a salesman reeds to sell 9 systems (ie £45,000 worth) in a year to cover his direct costs. The Computerland branches contacted reported an absolute minimum or £250,000, even for new salesmen, with an average of up to £500,000 for trained salesmen and up to £600,000 for particularly good personnel; and the recorded performance of our own sales team confirms this. Cashflow (apart from debtors) is accordingly minimally affected. Once the baseline business of the company has been soundly established (which is forecast to be the end of the first year; but may be as early as 6 months if the sales team meet their known potential rather than the pessimistic levels used for the financial forecasts), it is planned to recruit further salesmen as suitable personnel can be found to match territories. Typically these junior salesmen will be recruited from outside of existing dealers (where the initial staff are being recruited exclusively from the existing dealer pool). They will be graduates with suitable industry experience, who can demonstrate the potential to rapidly become good salesmen.
At the other extreme the on target income per senior salesman is planned at £30,000; in line with the established industry averages, to attract the quality of salesman needed. The sales target is, though, £400,000 per head, as opposed to the £200,000 included in the year 1 forecast.
b) Technical Support
The importance of the function is evidenced by the relative seniority of the technical manager (once more already recruited).
Technical support staff will be planned at to ratio of one for every two salesmen. This ratio may be increased if the planner emphasis on support requires this.
Such staff will however have their costs largely covered by selling part of their time to customers;
I)Software : the emphasis will be on providing expert support for packages rather than writing complete systems; though a limited amount of tailoring and consequential programming, may be necessary. It would intended that the manager recruited would be experienced in this field, subsequently supported by a limited number of high calibre full-time staff (already identified) as soon as the volume of business justifies it, to supervise a larger number of part-time (housewife) staff from the surrounding areas.
II) Customer Engineering: a standard IBM service will be provided. Again the supervisor (already recruited) will be higher caliber but his staff may be trained from YTS personnel. Any cabling services will use contract labour.
III) Education :a range of courses, wider than normal, will be offered; featuring an application based rather than a technical approach. The "Trainer" (already identified) will be assisted by software personnel and backed by part-time personnel and salesmen (who will be required, as a part of the selling strategy, to provide a high proportion of their expert technical. support requirements themselves)
.
IV) Draftsmen :as part of the Architects CAD drafting bureau one or more trained draftsmen will be employed, justified by the volume of business.
V) Admin : it is intended that the function will be managed by a more senior person than usual (already identified) since the person will also manage on a day to day basis the people and resources supporting the building based activities. Again additional admin support will be mainly by part-time staff.
Apart from senior personnel, with established track records, already identified by the partners and management, all junior personnel will be recruited via an extended in-depth process (based on that successfully pioneered by BTR, with some elements from IBM practice); since the quality of staff is seen to be the most important investment.
It is recognised that the most critical element of any dealership. and usually the most difficult to achieve, is a trained team of personnel (and in particular salesmen; where those of the requisite high calibre are generally very difficult indeed to hire). Based on the excellent industry contacts of the partners and management this hurdle has already been surmounted; since the team ready to start represents one of the best, certainly highest qualified, available to any dealer in the UK.
7 FACILITIES/CAPITAL EQUIPMENT
a) Premises
The location is most important, in that although "out-of-town' it is very easily accessible (only 250 yards from the first interchange leading to the M3) at the heart of the local road network; and at the same time easily
locatable/visible (it is the only obvious office building on this stretch of road). As a subsidiary function it will ‘advertise' the service very visibly on a heavily travelled road (the main artery from South West London to Heathrow).
The space at 5,100 sq ft is larger than most (but is comparable with the highly successful Manchester branch, and is in line with the reccomendations of the existing Computerland dealers). It is no more expensive than the alternative sites, and is designed to allow excellent support, even for the higher numbers of personnel in year 2.
The ground floor (2,500 sq ft) will mainly be fitted out as a 'customer support centre' (showroom), but it will also be used as a work area; effectively demonstrating a working office environment, including networks, multi-user systems and CAD. Also on the ground floor will be the sales office.
The upper floor (also 2,500 sq ft) will comprise 50% classrooms/meeting rooms, including a customer "user-club" room/library, and hands-on demonstration/teaching areas. The remaining 50% will be used for the workshop and storage area, and admin/offices.
b)Furniture/Office Equipment
This will require to be of a high standard, as per Computerland spec, where most of this will be in the `customer support centre' (showroom).
c) Demonstration Equipment
The number of machines in the demonstration stock will be rather higher than normal, reflecting;
I) The policy of stocking and demonstrating the whole IBM PC range, as a promotional tool.
II) Support for the more sophisticated applications of CAD, multi-user and LAN
III) Some basic machines for bureau and ‘trial-use’ activities.
d) Other Items
These are as per Computerland recommended schedule. Only the cars are leased.
8 PROFIT AND LOSS
A sensitivity analysis shows that profits are most sensitve to volume (revenue) and to margin.
a) Volume
The forecast is based on 9 man years of trained sales effort (allowing no contribution from the partners and sales manager; though there will in practice be some such contribution) and assumes sales of £1.5 million in year 1 (in line with Computerland branch averages, but at only £200,000 per head; with twice the number of salesmen), £3 million in year 2 (at £250,000 per head) and £4.5 million in year 3 (at £300,000 per head). The evidence shows that these figures are pessimistic, with other dealers planning on a currant, absolute, minimum of £350,000 per head from relatively untrained personnel.
Volume is, as the market is still unsaturated, effectively proportional to the number of (successful) sales personnel. The first priority will, therefore, be to recruit the largest salesforce possible, within the limitations of the quality available; and within the constraints of support resources (since cashflow is not significantly affected, in any negative way, by increased numbers of salesmen).
b) Margin
The forecast uses the , pessimistic, Computerland projection of 30% gross margin (after the franchise payments). The Computerland branches have stated that their own recent experience would indicate a figure of 30% on the hardware/software package; due to the increased discounting. They do however point out that they also have an income, at a very high level of profit, from training that typically runs at between 5% and 10% of overall revenue. The effect of this is to increase their overall margin to 35%; despite this the lower 30% figure is used. The level used in its projections by Entre (the main comparable competitor) is also 35%.
The evidence is that the worst excesses of discounting are already reducing significantly as the business becomes more technically sophisticated (particularly with LAN's due to be heavily promoted by IBM), and as IBM launches its new ranges and the product cycle moves into a phase where prices are accordingly firmer.
The business will in any case be targeted at the more technically sophisticated areas to reduce discounting, and any discounting will be offered in the form of free education (as part of continuing marketing programmes).
The forecast 30% margin, however, pessimistically assumes no reduction in discounting or any income from the higher margin activities.
c) Fixed Costs
Of the effectively fixed costs of £170,000 per annum approximately half are for the premises, and most of the remainder is office costs. Funding the £220,000 loans (and £25,000 average overdraft in year 1) will cost of the order of £30,000 per annum.
d) Variable Costs
These are all marketing related, and the larger proportion is for the sales and support staff (and at £333,000 basic plus £120,000 commission and 10.5% NI, in year 2 this represents 17% of revenue; giving a total of 20% with advertising).
e) Break-Even
On the forecast figures breakeven will be achieved at £1.7 million turnover (£2 million if the loan cost is included).
On forecast the net profit goes positive in 5 months. After a net loss of £122,000 in year 1, a net profit of £147,000 is forecast for year 2 and £326,000 for year 3. All the scenarios investigated show the company achieving good profitability levels and even the 'worst case' studies (based on significantly lower sales figures and gross margins, but with undiminished costs; a situation that clearly could not occur, scarce costs would be reduced in line) show profitability (even after loan interest payments) being achieved during the second year.
The forecast shows a worst cash flow position of £498,000 occurring in month eight. This assumes a worst case where all parts of the business start to grow rapidly (in both sales and costs) from the start date. In practice the various parts will be phased in (the phasing of the arrival of the salesmen and the initial promotional spending will, for example, reduce this maximum by between £30,000 and £.50,000). Of the £499,000 some 65%, a sum of £324,000, will be working capital, comprising £163,000 for stock (underwritten by "buy-'back" by Computerland) and £162,000 for debtors (mainly blue-chip, but all checked by Dunn & Bradstreet). This leaves only £174,000 at risk overall in the fixed capital/initial trading loss elements (where the equity funding by itself is £215,000).
9) SOURCE OF FUNDS
The two partners will each provide £80,000, and 3i will invest £55,000, for their shares (respectively 37.5% each and 25% for 3i) in the equity. In addition 3i will provide a long term loan of £145,000. It is intended that there will be a further long term loan of £75,000 (guaranteed by the government's small business scheme) and an initial overdraft facility of £25,000, both to be provided by the Royal Bank of Scotland. This level of funding is considerably more than the normal Computerland requirement (of £240,000), the extra £220,000 being exclusively used to finance working capital needed by the additional marketing activity (there will be at least seven trained salesmen instead of the three
relatively untrained salesmen normally employed by dealers) giving a much faster take-off. It will also fund the whole of the debtors (where these are normally factored by other dealers; though, in the case of a very rapid take-off, invoice discounting may also be used in the business to handle large peaks in cash flow).
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